Banks forced to take bailout money they don't want or need

There are thousands of banks in the United States, most of which are local and have less than a billion dollars in assets. Some of them are even making a profit this year because they were careful and didn’t expose themselves to the mortgage and credit crises. Some of them were (gasp!) risk averse and (double gasp!) run wisely. So why are these strong banks being forced to accept federal bailout funds that they don’t want or need?

I’ve been digging based on a tip I got from someone in banking, and I’ve found that most if not all strong banks are signing up for the Treasury’s “Capital Purchase Program,” the program by which the Treasury is taking an equity portion of the bank in exchange for an influx of cash that is intended to be used in the bank’s lending. According to a story in the Houston Chronicle, banks throughout Texas are taking the federal money even though they don’t need it for a number of reasons. And some of the banks were worried about refusing the money because, as the President of Prosperity Bank Dan Rollins said:

The regulators are pushing us so dad-gum hard, we’re scratching our head saying, ‘If we don’t take it, does that put us on their bad list?’

I was told that the regulators supposedly asked the bank to participate, but the bank wasn’t given a choice to participate or not – the funds (equal to approximately 3% of the bank’s total assets) just “showed up” one day. According to the American Banking Association (via the Wall Street Journal Deal Journal blog), my source’s bank was hardly the only one. According to the WSJ, ABA president Edward Yingling wrote to Treasury Secretary Henry Paulson

[M]any banks have been contacted by regulators, and urged, sometimes forcefully, to participate in the [Capital Purchase Program] (emphasis original).

If we assume for just a moment that the $250 billion used for the Capital Purchase Program is going to all of the banks in the U.S., than a huge amount of money is being forced on businesses who don’t want it. According to the ABA letter mentioned above, 95% of all banks were sufficiently capitalized and didn’t need the extra cash. If we even assume that only 50% would have said “no” had they not been pressured, that’s almost 120 billion that didn’t need to be spent.

So why was it?

I’ve been thinking about this some and I’ve come up with several possible reasons, although there may well be more.

First, the Treasury may be hoping that the strong banks will use the money to buy up their weaker brethren, although why a bank would voluntarily take on a likely unquantifiable amount of risk in this economy is beyond me.

Second, the Treasury may be hoping that the stronger banks will lend more of that money to people in need of loans. But if the banks are strong, then that means they were making smart lending choices, and so they’ll be much less likely to make loans to the very people who need the money the most – the high risk creditor. This isn’t likely to happen almost by definition.

Third, the Treasury may simply disbelieve that the books at the strong banks are accurate. A good accountant can make nearly anything seem possible, irrespective of legality, and with all the problematic securities floating around, I can buy that the economists at Treasury are skeptical about any bank’s books these days. It’s not fair to the banks that are really strong and that have been managed well and soundly, but I can at least buy this one.

And lastly, the Treasury may be spreading around their risk. Just like a mutual fund spreads around its investments in order to mitigate its exposure to a single stock tanking, Treasury could be figuring that by forcing banks to take a cash loan – and to pay it all back at 5% interest in the first 5 years with a jump to 9% interest afterward – they reduce the chances that they’ll lose money over the long run. After all, if only 5% of all banks are having problems as the ADA President suggests, then even if the Treasury loses every penny on that 5%, they’ll make a killing on the 95% of other banks who survive, likely more than offsetting the losses.

And while I understand that the Treasury is required by law to attempt to make the government money, they probably would have got enough real volunteers to participate in the Capital Purchase Program to still make money on their investment.

There is a fifth reason you overlooked. It kind of coincides with the fourth. That is, they are forcing these strong banks to take these loans to increase the interest income of this “bailout”. When it gets right down to it, none of this makes any sense, except for those making a profit from it. That would be the Federal Reserve!

The Fed’s not going to do too well on this go around, despite what some pundits say. They won’t get killed,as the Fed is just a big clearing firm/market maker, lender of the last resort. The Fed’s books aren’t looking too good right now, and I doubt if they even know the toxicity of their portfolio.

The quoted reason by the Treasury for forcing solvent banks to take the cash is that it reduces the “stigmatism” of the banks that have to take it. They felt that the stigma associated with a government bailout might make people balk at doing business with those banks. Which is right, because who wants to bank with a company that makes such bad decisions that they have to be bailed out by the government. Of course, if they had just let those banks fail and the successful ones move into the gap, we wouldn’t have to be doing crazy things like giving money to banks that don’t need it.

Jeff go to youtube and look up Lindsey Williams. Listen to him carefully and understand how his predictions or inside information if you will has come true. Then you will understand that the dollar is purposely being killed so that it can be replaced with a pure electronic currency that will extend the control of the gov to incredible levels.

With all due respect, Lindsey Williams it the kind of right wing crackpot that rightfully serves up ammunition to the left. I don’t blame the left for making fun of a guy like Williams, as he’s so far out there, he’s out of the solar system. People of him make conservatives like me look really bad. I don’t wish to be associated with a person of his ilk. Looking for a conspiracy under every rock, blaming international (code word…..Jewish) bankers and oil companies controlled by said bankers for all our problems, Williams type of person makes it hard for a serious person like myself to be taken with anything but a grain of salt by anyone on the left. He might be right once in awhile, but then again, a broken clock is right twice a day. The price of the dollar is determined by free market forces, government intervention, interest rates, and the velocity of money. As for an electronic currency, most dollars are already in electronic form. The government publishes money supply figures on a regular basis and you can look up the amounts of dollars in cash, checking, and electronic forms anytime you want. As for the dollar being killed, logic dictates that a dead dollar would be bad for general business conditions on a worldwide basis. And purposely killed…..please. Although I abhor governmental control of my freedoms, in reality, one can expect the government to always get bigger, take away more of my rights, and tax me more. One must remember that the government class is populated by looters and moochers, and the purpose of government is to remove freedoms, not protect them. This being said, I just have to deal with it, the same as you.

It has become more an more obvious that the polico have become so adversarial and winning so important that they will do anything to be sure the sucess visible when banks are liquid again goes to the party in power. On a side note with so many with thier hands in the Govt till have we not tilted the voting eqation such that all of these will guarantee their vote for the party that give out the Govt money. Interesting philosphical discussion!

Isn’t it just that the Fed did not want to stigmatize the banks that needed money (their friends)? Showing that the bank that needed money were exactly the ones that have been accomplicing with the government is definitely not in the interest of the “economic planners” that have triggered off the crisis…

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